Insights from BCC Research

Biotech is Poised for Flight as Venture Capital Lifts its Wings. But Will it Crash?

Spectators worldwide are witnessing the potential formation of a biotech bubble. The industry has alternately been described as hot, volatile, booming, robust, frothy, overvalued, and overheated. Will biotech stocks continue to surge? Or will it turn out to be a biotech bubble that inevitably bursts?

VENTURE CAPITAL INVESTMENT IS AT A 15-YEAR HIGH

The biotechnology industry enjoyed $2.3 billion worth of venture capital investment during the second quarter, a 32% increase over Q1, according to the latest MoneyTree Report from PwC and the National Venture Capital Association (NVCA), with data from Thomson Reuters. One hundred twenty-six deals during the second quarter brought the total amount for the first half of 2015 to $3.8 billion. That positions the biotech industry to surpass 2014’s venture capital total of $6 billion.

Given that the first quarter of 2015 marked the highest level of venture capital investment since 2000—during the quarter that is historically the slowest—the inevitable question is whether current valuations are sustainable. Venture capital investment in the biotech industry made it the second-largest sector in terms of dollars, with $1.7 billion (the software industry continued to receive the highest level of funding of all industries). In an encouraging sign, funding for early stage biotech companies (formerly balked at) was up 59% in the first quarter compared with the same period a year ago, raking in $1.2 billion across 83 deals. During the quarter, first-time funding for the overall life science sector increased 69% to $440 million.

Investments in diagnostics and drug/device combinations were on the rise. According to BCC Research, the global molecular diagnostics market was valued at almost $21.7 billion in 2014. The total market is projected to grow at a five-year CAGR of 12.5% to reach nearly $25.2 billion in 2015 and $45.2 billion in 2020, said BCC in a press release.

BCC Research also says that the next-generation sequencing (NGS) clinical market is poised for huge growth as it prepares to enter several key market segments, including the molecular diagnostics industry. BCC reported that the market drivers of this vibrant industry include increased payer acceptance of NGS-based tests, lower test costs, and a growing need for better diagnostics as part of a molecular diagnostics trend.

A MIXED BAG OF THERAPEUTIC AREAS AND SEGMENTS

The company to bring in the most venture capital during Q2 was San Francisco-based Denali Therapeutics, which raised $217 million to further its research into neurodegenerative diseases. Other firms in the top 10 include antibiotics developer Melinta Therapeutics, which raised $67 million, and CytomX, a startup that brought in $70 million to advance its pipeline of “probody therapeutics” (antibodies that are engineered to target tumors while sparing healthy tissues). Also among the top 10 are three companies that are working on gene therapy—Regenexbio, Dimension Therapeutics, and Voyager Therapeutics—indicative of a resurgence of investment in this area.

According to PwC, 76% of all IPOs in the first quarter of 2015 were life science companies. During the second quarter, 14 venture-backed biotech IPOs raised a total of $1.2 billion, according to figures released last month by the NVCA and Thomson Reuters. PwC reported that among the biotechnology sub-segments that received the most funding in Q1 compared with the same period in 2014 were pharma ($212 million, an increase of 577%), biotech ($73 million, an increase of 521%), and biotech equipment ($11 million, a [97% increase).

PIPE DREAMS CAN GO UP IN SMOKE

The last major biotech boom was in 2000. The subsequent bust stemmed from the realization that the sequencing of the human genome didn’t translate to medical advances as quickly as had been hoped. Today’s investors are more realistic about the time lag from genetic discovery to marketable therapy.

The major biotech indices are performing well, reflecting positively of the translation from science to drug approvals and positive clinical trial data. In the last year, the Nasdaq Biotechnology Index and the NYSE Arca Biotechnology Index have risen 59% and 62%, respectively. Over the past two years, the Nasdaq Biotechnology Index has nearly doubled.

No matter the amount of investment attained, one risk that biotechs can’t duck is pushback by insurers if their products are priced too highly (see recent BCC Research blog on US drug prices). However, more competition would lead to downward pricing. For example, immunotherapy is, with nary a doubt, a hotbed of R&D activity. Given the number of companies that are working in this area, there will inevitably be competing immunotherapies on the market. If payers have several comparable treatments to choose from in a particular therapeutic area, one drug isn’t going to monopolize and command a budget-bursting price.

Of course, the bottom line is, the current era of exciting fast-paced science, combined with healthy optimism (and investment), inevitably engenders huge hype. And into every biotech campus, a little rain will probably fall. Current valuations of biotech stock may not be sustainable. Nevertheless, with persistence and ever-increasing knowledge, the payoff at the end of the venture capital rainbow will be new safe and effective treatments for a broad swath of diseases.